Power
Sector Reforms in Ethiopia: Implications
for Rural Electrification Short
Term Draft Report

By

Mr Mengistu Teferra

EXECUTIVE
SUMMARY

This study attempts to examine the legal and
regulatory framework in the power sector of Ethiopia from the point of view of
enhancing private investment in rural electrification. Local private investors
are expected to take up RE ventures, and therefore their capability to mobilize
local financial, technical and managerial resources has also been examined. By
way of setting the scene, the study has also attempted to make a literature
review of power sector reforms at the global, regional, and country levels.

The
literature review on power sector reforms (PSR) attempts to assess the origins
of the reform history on the global scene, the current status of reforms and its
relevance to Ethiopia. Various authors point out that the objectives of reforms,
the paths of reforms followed, and the advances made in reforms so far, vary
from region to region and from country to country. The general notion that is
formed by any reader on PSR is that these reforms are about restructuring of
public utilities, corporatisation and commercialisation of utility operations,
establishment of the legal and regulatory framework, setting a level playfield
for all operators in the power sector, privatisation of existing public utility
assets and private sector investment in green-field power projects.

Africa,
in particular, appears to be on the trailing end of the reform process, with
only a few countries having attempted internal restructuring and
commercialisation of their public utilities.

Ethiopia
appears to have taken the first essential steps of setting up a regulatory
agency, issuing proclamations to change the legal and regulatory framework,
restructuring its public utility (EEPCO) and re-orienting EEPCO's duties and
responsibilities on commercial lines.

Available
literature on PSR is found to be lacking with respect to RE in general, and RE
by local operators in particular. It appears that the original reform objectives
that were tailor-made for the developed world excluded RE, presumably because RE
is not any more an issue in developed countries. By comparison, RE remains a
major issue in the power sector of Ethiopia on several grounds (economic, social
and political). The power sector reform in Ethiopia should address the issue of
enhancing RE, particularly through the newly opened up opportunity for private
business. The review of RE situation in Ethiopia and the issue of private sector
participation in RE underlines the importance of taking up further study
focusing on 3 important prerequisites for addressing RE issues:

The financial, managerial and technical resources
that can be mobilized locally by investors.

The legal and regulatory framework governing the
sector.

The financial viability of RE schemes.

Accordingly,
the financial, managerial and technical capability that can be mobilized by
local investors has been studied inhere, along with the actual requirements of
such capability for setting up and running rural IPDs. The findings on these
lines are that:

Local investors will have no problem of obtaining
bank loans for the investment amount required for setting up independent
power generation and distribution systems in rural areas, as long as they
present proof of the financial viability of RE schemes. However, the study
has not as yet established the financial viability of RE schemes under
prevailing loan terms in local banks.

Local investors will have no
problem of meeting skills requirements to set up and run rural power supply
systems. However, electrical equipment and materials for electricity supply
line works are not available on the market, and therefore have to be
purchased from EEPCO on special request.

The
legal and regulatory framework in the power sector has also been investigated
inhere. To this end, all existing proclamations and regulations have been
studied in some detail. The findings are that:

The legal and regulatory framework allows the
setting up of independent power generation and distribution systems in rural
areas for commercial purposes,

The legal and regulatory framework is mute on the
issue of bulk purchase and onward retail of grid electricity to rural
customers, thereby indicating a critical regulatory loophole that is not
conducive to investors in RE business.

The
recommendations arrived at are:

An explicit legalisation of bulk purchase and onward retailing of grid
electricity to investors in RE

Enhancement of capacity building within the Electricity Agency

Fostering cooperation between EEPCO and private investors in RE (for supply
of electrical equipment and materials, as well as training of technicians in
privately operated rural electricity supply centres)

Further
study of the financial viability and special incentives package for investors in
RE (to be able to make specific recommendations that could improve the financial
attractiveness of RE for investors).

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